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Nevada Supreme Court Rules that Employers Cannot Assign Noncompete Agreement Absent Employee Consent and Independent Consideration

Volume 3, Issue 4
April 15, 2004

In an issue of first impression, the Nevada Supreme Court addressed the question of whether noncompetition covenants may be assigned from one employer to another through an asset sale. The case involved a former employee of United Rentals, Phillip Burkhardt, who switched jobs to work for NES Trench Shoring after becoming dissatisfied with United Rentals' customer service policies. As a condition of employment, and in exchange for $10,000, Burkhardt signed a noncompetition and nondisclosure agreement with NES that required him, for a period of one year, to refrain from engaging in the selling, leasing, marketing, distributing, or dealing with trench shoring equipment within a sixty-mile radius of his work location. The agreement also required Burkhardt not to ever reveal certain confidential company information.

Subsequently, NES entered into an asset purchase agreement with United Rentals that included goodwill, under which United Rentals paid three times the concern's fair market value. The purchase agreement allegedly included all of NES's noncompetition covenants. Burkhardt remained as United Rentals' Las Vegas sales manager during the transition period following the sale, but again became dissatisfied with United Rentals' customer service. He left to accept employment with Traffic Control, a competitor.

Burkhardt began contacting companies to solicit business on behalf of Traffic Control. United Rental, through counsel, sent Burkhardt written notification that his new employment constituted breaches of his noncompetition and nondisclosure agreement. In light of Burkhardt's continued relationship with Traffic Control, United Rental and NES commenced the action below to enforce the agreement.

In defending their actions, Traffic Control and Burkhardt contended that the purported assignment of Burkhardt's noncompetition agreement with NES to United Rental was invalid. The Nevada Supreme Court agreed. It noted that because the loss of a person's livelihood is a very serious matter, post employment anti-competitive covenants are scrutinized with greater care than are similar covenants incident to the sale of a business. Given the serious nature of such agreements, and the absence of an express provision providing for assignment, the Court held that covenants not to compete are personal in nature and therefore are not assignable absent the employee's express consent. It also held that an employer must obtain such consent through "arm's length" negotiation with the employee, supported by valuable consideration beyond that necessary to support the underlying covenant.

This decision is important for any employer currently utilizing noncompetition agreements, particularly those selling or purchasing the assets of a business that include employee noncompetition agreements. Existing noncompetition agreements should be reviewed and modified to address the Court's new requirements.

Traffic Control Servs., Inc. v. United Rentals Northwest, Inc., 120 Nev. Adv. Op. 19 (Apr. 13, 2004).

Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.